lect 8

• What does the NBFI sector include?

  All non-bank financial entities
• The funding source for NBFIs is primarily market-based
• NBFIs pose the same risks to the financial system as banks because they perform similar maturity and asset transformations.

  False
• What vulnerabilities in NBFI activities were highlighted by the Great Financial Crisis and the pandemic?

  Amplifying economic shocks
• The NBFI sector has grown faster than banks
• What is the term used to describe a subset of the NBFI sector that includes investment funds and finance companies?

  Other Financial Intermediaries
• The relative size of NBFI in emerging market economies has increased at a faster pace than in advanced economies.
• Match the term with its description:

  Shadow Banking ↔️ Credit intermediation outside the regular banking system

  Financial Stability Board ↔️ Regulatory body defining shadow banking

  Systemic Risk ↔️ Risk that could destabilize the entire financial system
• What are two conditions under which shadow banking can become a source of systemic risk?

  Bank-like functions and interconnectedness
• The shadow banking system fully recovered to pre-crisis levels after the 2007-2009 financial crisis.

  False
• Shadow banking transforms credit, maturity, and liquidity through securitization rather than a single balance sheet like banks.
• What is the purpose of securitization in the shadow banking system?

  Repackage loans into securities
• The shadow banking system transforms risky, long-term loans into short-term, credit-risk-free instruments.
• What is the originate and distribute model used in shadow banking?

  Banks decouple loan production from risk
• The global financial crisis of 2007-2009 exposed significant vulnerabilities in shadow banking activities.
• Steps in the securitization process in shadow banking:

  1️⃣ Loan origination

  2️⃣ Loan warehousing

  3️⃣ Pooling and structuring loans into ABS

  4️⃣ ABS warehousing

  5️⃣ Pooling ABS into CDOs

  6️⃣ ABS intermediation

  7️⃣ Funding in wholesale markets
• What is the primary function of a finance company?

  Lending to individuals and corporations
• Unlike depositary institutions, finance companies do not accept deposits
• Many large finance companies are captive subsidiaries of major manufacturing firms.
• What is the role of captive finance company subsidiaries for parent manufacturing firms?

  Provide financing to customers
• Finance companies compete directly with depositary institutions for consumer lending.
• Finance companies often engage in wholesale financing to provide funds to dealers for purchasing goods.
• Why do finance companies charge higher interest rates than depositary institutions?

  To compensate for higher risk
• Match the type of finance company with its specialization:

  Sales finance institutions ↔️ Loans to customers of retailers

  Personal credit institutions ↔️ Loans to individuals

  Business credit institutions ↔️ Financing for corporations
• What activities do finance companies perform that are similar to investment banks?

  Brokerage services
• Specialized securities firms focus on the purchase, sale, and brokerage of existing securities.
• Specialized activities of securities firms:

  1️⃣ Venture Capital

  2️⃣ Market Making

  3️⃣ Trading

  4️⃣ Investing

  5️⃣ Cash Management
• The asset portfolio of securities firms primarily consists of financial market securities.
• What is the major asset held by securities firms in their portfolio?

  Reverse purchase agreements
• What does the graph measure in trillions of dollars?

  U.S. liabilities

  
• Shadow banking liabilities peaked in 2008:Q1 according to the graph

  
• What is the primary characteristic of non-intermediated credit intermediation?

  Direct lending

  
• In non-intermediated credit intermediation, individuals directly lend to households or businesses without a financial intermediary

  
• NBFI assets increased as a share of total financial assets in 2019

  
• NBFI assets experienced a slight decrease in 2018.